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May 20, 2013

When Your HNW Clients Make Music, Be Sure They’re Covered

For many baby boomers who gave up on being a guitar god before turning 30, the next best thing is achieving a level of success that allows them to afford a vintage Stratocaster or Les Paul of the same era that was played by the heroes of their youth. If they’re successful enough, they can afford the actual guitar. Eric Clapton’s ‘Blackie” sold for $959,500 in 2004, the highest sales price on record for a publicly sold guitar. Who knows what it would sell for now?

The one true rock star of musical instrument prices, however, goes much farther back than the 1960s. Think Antonio Stradivari from the 1700s. His violins regularly sell for millions, with the “Lady Blunt” Stradivarius auctioned off for nearly $16 million in 2011. The previous record for a Stradivari violin was $3.6 million in 2010.

While few HNW clients can afford such stratospheric prices, many do own high value instruments. They may be accomplished musicians themselves, or have children in rigorous music programs, or both. In many cases the instruments can represent a significant part of the contents value of their homes. We’ve seen collections of more than 50 guitars of varying types and grand pianos valued at more than $100,000. HNW clients often count their instruments among their most prized possessions from both a monetary and emotional standpoint.

That double-take on value makes it especially important to insure the instruments properly, and wealth advisors have an opportunity to strengthen their relationships with clients by helping HNW clients manage the risks associated with this asset class. Here are six considerations to keep in mind.

1. Secure coverage with a valuables policy.

As with precious items in general, the most prudent approach is to insure the instrument collection with a valuables policy, also known as scheduling. Unlike a homeowners policy, a valuables policy includes coverage for loss due to flood or earthquake. Valuables policies also typically have no deductible, and they allow the owner to declare a specific value for the instruments in advance of a loss. The best policies will then promise to pay at least the specific declared value, even if a damaged or stolen instrument could be replaced for less at the time of loss.

2. Keep the declared value of the instruments up to date.

The valuables policy will not fully service its purpose if the owner fails to declare an adequate value for the instrument. Most do so initially, but many fail to keep the replacement cost up to date. Remember, instruments can appreciate in value over time. For high-quality stringed instruments, especially, the common belief is that age and repeated playing improves the sound. In addition, the supply of a famous make and model year only diminishes over time, due to accidents or museums that purchase the instrument and effectively remove it from circulation.With some instruments staying in families for generations, replacement values could be worth three or four times the original purchase price. The Lady Blunt violin sold for more than $200,000 four decades ago. Should the instrument be destroyed or stolen, the owner runs the risk of only getting a small fraction in compensation for it. To keep values reasonably current, we suggest having valuable instruments professionally appraised at least every three to five years.

3. Seek valuables policies that provide market value coverage.

For protection in between those appraisals every three to five years, seek valuables policies that provide market value coverage. This benefit, usually available from carriers that specialize in serving HNW families such as ACE, will pay the market value of the item just prior to the loss up to 50% more than the scheduled amount on the policy.

The market value can also play an important role in settling losses when an instrument has been damaged and repaired. Although the instrument may essentially look and sound the same after the repair, its history of damage may result in a loss of market value. Some companies will appreciate this loss in value, while others may not, saying the instrument has been sufficiently restored for all practical purposes.

4. Be aware of coverage limitations and requirements when playing for pay.

Not surprisingly, many HNW clients who own fine instruments play them exceedingly well and find time outside of their careers to be involved in bands or ensembles that perform at various venues throughout the year. Or perhaps they enjoy teaching others how to play. If they receive income for performing or teaching, they need to be aware that standard industry valuables policies may require a special endorsement to maintain coverage for the instrument. Policies from HNW-market carriers may be more lenient in this regard, as long as the income is incidental.

5. Use only reputable and well insured repair shops.

More so than precious works of art, musical instruments may need to be restored or adjusted from time to time. Guitars for instance, occasionally require tweaks to insure the necks remain true. Owners should be aware that many policies, even those from HNW-market carriers, may not cover damage to the instrument while it is being repaired or restored. Therefore, the owner should be careful to bring the instrument only to specialists that are well established and have adequate coverage in the case damage or theft occurs when the instrument is in their possession.

6. Beware of intentional acts.

Perhaps one last risk for those die-hard rock fans trying to rediscover their youth: don’t get too carried away when finishing the last Townshend power cord or Hendrix riff. Intentional acts like smashing and burning property are excluded from virtually all insurance policies.